Barrie, Ont.-based ValueTrend portfolio manager Keith Richards thinks so and he offers nine indicators as the evidence that convinced him to adopt a bearish market outlook and a defensive investment strategy.

There’s no other way we can describe my current market outlook than to say “Bearish”. At ValueTrend, we’ve held a defensive portfolio stance through the first quarter of this year. Yes, we missed out on some upside as markets rallied in February and March. However, there is reason behind our madness. Allow me to point out some indicators that encourage a defensive position. Some are technical indicators (crowd and price behavior) and some are fundamental indicators (valuation and economic):

Non-confirmation between industrial stocks & transportation stocks: Charles Dow pointed out 100 years ago that when the companies that make stuff (manufacturing stocks and technology stocks like Microsoft) aren’t shipping that stuff (rail, trucking and air) you have a problem. Right now, as with last March (when we sold out of stocks in a similar manner), the industrial stocks are not being supported by transportation stocks’ movements.

Smart money selling, dumb money buying: Retail investors such as small stock investors and mutual fund buyers are known to make emotional decisions. They buy high and sell low. That’s why we call that group ‘dumb money’. Meanwhile, sophisticated traders, large institutions, pension managers, and commercial hedgers are selling. They notoriously call the markets correctly, which is why we call them ‘smart money’. We track these groups independently. Take a guess as to how the smart money and dumb money investors are positioning themselves. . . . Hint: it’s not looking good for the dummies.

Déjà vu all over again: Been there, done that. That is, we’ve seen the S&P 500 hit 2130-ish over and over and over for 18 months now. And it’s gone as low as 1880 several times (last summer twice, and once this January).

This week the S&P 500 hit just under 2080. The implied upside from there is about 3 per cent. Do you know of a catalyst that could drive it through that level? We don’t. We think that’s the lid for now. The implied downside is about 9 per cent if the S&P hits 1880 again. That’s a 3:1 risk to reward ratio. Would you take a $100 bet if all you could win was $3 and you could lose $9? Didn’t think so. . . .

The Fed: Fed Chairperson Janice Yellen recently implied that the Fed will NOT raise interest rates for a while, given poor job numbers and world events. However, she is stuck between a rock and a hard place as far as stimulating growth again – she can’t go back on her words spoken in late 2015 to become fiscally tighter. So, don’t expect more stimuli in the near term. The market is cut off from its favorite drug.

Seasonal: Sell in May and Go Away. Soon it will be the end of the best 6-month strategy.

Election: In this corner, we have extreme right winger Donald Trump promising to end free trade, build a wall, and start World War 3. In the other corner we have extreme left wing candidate Bernie Sanders, who wants to increase taxes and feed the sense of entitlement like his Canadian PM counterpart has done. Somewhere in the middle we have Hillary Clinton, who is facing an enquiry into alleged email cover-ups, and Ted Cruz who recently posted a video of himself frying bacon by wrapping it around a machine gun and firing it. Would you feel bullish knowing any of these people were in charge of the most powerful economy in the world?

Expect volatility as the reality of these choices sets in with investors. The historic pattern for markets during a presidential election year is volatility leading into an election, and bullishness after the election is decided. This makes sense, given the uncertainty that is lifted after that event. Further, whenever a new president or (in Canada’s case) prime minister is elected, markets can go through a bit of a “Honeymoon” phase.

World events: More déjà vu from last year. Greece, China, Brazil, Europe, Japan—all in trouble (still). Or how about– ISIS, oil pricing, currencies, bond yields, and immigrant challenges? Lots of issues in the world for the markets to get worried about.

Earnings and Valuation: According to www.multpl.com, the trailing P/E ratio on the market is at the high end of its historic range, at 22.6 times earnings. With the exception of the bubble 2001 and 2008 levels, the trailing PE doesn’t like venturing much above the low 20’s before reversing. Strength in the markets has been driven to a large degree by these expanding multiples and not earnings growth.

Meanwhile, we enter the current earnings season with the risk that earnings do not support the recent market strength. The result of a disappointing earnings season will very likely lead to weak markets.

Global Debt: Since the financial crisis, many of the advanced economies have prudently reduced private debt, only to significantly increase public debt. Emerging economies and those economies less impacted by the financial crisis, the Bank for International Settlements points out, are now increasing private debt to record levels. As the world struggles with this excessive use of leverage, we believe this represents an additional risk to markets.

OK, so we’re bearish. What are we doing about it?

Cash: In the equity platform, we hold cash. Lots of it.

Hedging: We’re gradually adding hedge positions to the equity platform. We recently began legging into the Horizons VIX ETF (TSX─HUV), which goes up when markets get choppier. We’ve also bought a bit of the Ranger Bear ETF (NYSEARCA─HDGE), which shorts about 30-40 stocks from the S&P 500. It goes up if markets go down. We’re looking to do more hedging by stepping into this type of position a bit at a time.

Reducing growth stocks: We have been reducing and expect to continue to trim our growth-stock positions. This includes most of our technology stocks, and all of our consumer discretionary stocks exposure.

Increasing defensive stocks: We recently bought defensive sectors like gold stocks and consumer staples stocks through the Consumer Staples Select Sector SPDR ETF (NYSEARCA─XLP). We’re looking to buy further into defensive stocks such as the REIT space, where we’ve recently acquired a position in Smart Real Estate Trust (TSX─SRU.UN). We’re also focusing on some higher dividend ETFs that play on that theme. We like the BMO Canadian Dividend ETF (TSX─ZDV). The fancy term for this strategy of selling growth to buy defense is “beta reduction”.